Chris Lee & Partners Ltd

Taking Stock 27 February 2025

IF any investor is interested in how quickly poor governance, poor management, and maybe difficult markets can lead to the destruction of shareholder money, then keep reading.

If such news invokes nausea, skip this item.

First, some facts.

On 31 December 2005, the following companies, listed on the NZX, enjoyed share prices as listed:

Sky Network Television - $6.30

Sky City Entertainment - $4.69

Telecom/Spark - $6.01

Fletcher Building - $7.55

But wait, there is more to digest.

Since that date, Sky TV has had a 1 for 10 reconstruction, so the fair comparison of its 31/12/05 share price is $63.

Spark, of course, shed its Chorus division in 2011 after its chief executive, fast-talking salesperson Theresa Gattung, lost contact with the politicians and regulators and blew Telecom into two, Spark and Chorus.

Fletcher Building has had more than one dilutionary, discounted cash issue.

The prices as at time of writing are:

Sky Network Television - $2.50

Sky City Entertainment - $1.33

Spark - $2.34

Fletcher Building - $3.34

All four companies have enjoyed extensive support from fund managers throughout the 20 years.

All four companies exist in many retail investor portfolios.  I still own Spark.

At what point is wealth destruction the catalyst for a board and management cleanout?

My view is that Spark is currently the most urgent case to discuss, having seen a billion wiped off its market capitalisation last week after posting a half-year profit figure that places the spotlight on its long-term strategic errors, the worst of which seems to have occurred last year.

If one goes back to the disastrous Gattung era one finds one excellent decision. That was the sale of its obsolete Yellow Pages division in 2007 for NZ$2.240 billion to a joint venture between a Hong Kong fund and the giant Canadian Teachers Pension fund.  Sadly, the driver of this brilliantly timed sale was not the CEO or even the board.

The sale was the result of the analytical and execution skills of one Marko Bogoievski, at the time the Chief Financial Officer at Telecom.  (Today, Yellow Pages, if sold, would be worth fob pocket money).

Bogoievski’s foresight led to the sale. He later left Telecom and then produced a range of largely successful transactions for Infratil.

As far as I can see, the sale of the doomed Yellow Pages to some hapless international pension funds was the last great idea Telecom has had.

Its worst decisions seem to have been last year, when it sold the last of its mobile phone towers, the 17% legacy holding it retained after selling 70% of its holding in 2022.

It sold the remaining 17% for $314 million to the Canadian buyers, just as rates and yields were about to fall again; pity. Selling the towers might have been a good decision had Spark displayed an investment plan that would add to its market status and deliver higher returns to shareholders.

Instead, the hapless Spark board, in 2024, announced yet another share buyback at a time when its shares were around $5.05. The board decided the buybacks were the best mechanism for rewarding shareholders, who had seen the loss of the cell tower assets.

By inference, the Spark board believed Spark’s shares were underpriced, and that by buying back shares at $5.05 the board would ensure the remaining shares would rise in price.

Move forward just 10 months.

Spark announces a dreadful result, grieves about the problem of making money in an over-competitive market, and watches the shares trade in tens of millions at the price (on 24/2/2025) of $2.39.

With due respect, one must question the level of understanding of the company’s progress held by its chair, Justine Smythe, and CEO, Jolie Hodson, and the other directors. Smythe has been on Spark’s board for 14 years and has been chair since 2017.  Hodson has been CEO since 2019. Critics will wonder how they could have been so wrong in the assumption of the value of a buyback.

The other Spark directors are David Havercroft, Lisa Nelson, Warwick Bray, Sheridan Broadbent and Gordon MacLeod.

Understandably, the critics will be calling for Smythe and Hodson to hand in their rifles. I agree. Hodson was paid $2.2m as CEO for the 2019 year.  Spark has failed to reduce costs meaningfully. Smythe and Hodson have lost the faith of investors.

If there is to be accountability, surely now is the time to witness it.

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The Fletcher story has often been told.

It is a tale of a board for too long dominated by Hugh Fletcher, whose delusion of commercial brilliance was almost Trumperian, followed by some awful leadership, Ralph Norris and Mark Adamson being the leaders in the nadir years. Both would be on my NEVER AGAIN list.

Adamson, a believer in managerialism, took risks that Norris should never have allowed and was probably seen for what he was when he claimed that those presiding over some dreadful decisions should be paid millions per annum more than the millions they were receiving.

Managerialism is a term that implies disrespect for knowledge, experience and science. It implies entitlement. At its essence it argues that any good manager can lead a team of people who have expert knowledge and experience. Please do not tell that to engineers, scientists, health specialists or even capital market experts.

Managerialism is probably one of the great rorts imposed on investors by those with social objectives rather than leadership and commercial success objectives. (I once worked for an advocate of managerialism. He destroyed three companies before he was recognisably unemployable.)

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SKY Television has been taken apart by new technologies and subsequent competition (eg Netflix) rather than just by idiotic decision-making.

The Sky TV story reveals a rare example of the Todds being clever, selling out before the company’s shares collapsed by around 90%. Todds made their money through clever use of government networks but Sky TV in recent decades has endured poor governance, poor leadership and poor investment analysis.

Today’s price of $2.50 seems respectable only because of the 1 for 10 reconstruction, meaning a holder of 10,000 shares now owns only 1000.

Sky City is another example of lost shareholder value. Its collapse may be partially the result of delays with its convention centre, another construction project bungled by Fletcher, though the fire that set the project back by years was at least partly bad luck.

Sky City may also be a victim of changing social attitudes towards mindless gambling. The market for casinos is dominated by absurdly wealthy madmen whose disrespect for money is so extreme that they will bet in millions, hoping to beat the house once in a while.

Its other market is a sorry group of poor people who bet their milk money on a miracle. Their motive seems to be abject desperation.

I can never think of casino punters without recalling the story of the objectionable, anti-social Australian mogul Kerry Packer, who dealt to a crass Texan with one of the great put-downs of all time.  The Texan had just won a million in a jackpot and strode around the casino imperiously handing out bottles of Moet to whoever was in the casino.

Packer declined the offer of champagne.

The Texan, hurt, asked Packer if Packer thought the Texan could not afford such largesse.  “You don’t know how wealthy I am,” said the Texan.

“What are you worth?” replied Packer.

“I don’t count up,” said the Texan, “but at least $100 million.”

“Toss you for it,” Packer replied.

Casinos are a magnet for such individuals.

Perhaps today casinos face more of what they might describe as “woke” regulators, who make rules designed to prevent the addicted from being exploited.

Addiction is a cruel condition. Some wonder whether casinos will one day be a victim to those in power who feel bound to impose their views on others.

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WHEN Heartland Bank last week announced a half-year $50m write-off that reduced tax paid profits to the sort of levels that a corner dairy might produce, I was reminded of the old adage, first discussed with me 40 years ago, that after a long-term chief executive retires, that is the time to write off every problem account. Heartland’s long-standing CEO Jeff Greenslade retired a few months ago.

During the post-Covid “crisis”, Heartland, like all the banks, was warned to be “kind”, not acting against those who were unable to meet their repayment schedules.  Rightly or wrongly, Heartland allowed non-payers and slow-payers to commit to new low-cost repayment schedules, sometimes allowing delinquent accounts to pay just $10 a week to keep the account alive and avoid write-offs.

I guess you could ascribe to such compromise either kindness, optimism, or a poorly-disguised attempt to minimise bad and doubtful debts.

My guess is that many of these new delayed-repayment arrangements were rarely honoured, despite cajoling, patience, kindness and eventually exasperation. Write-offs were inevitable.

My further guess is that many of the problems were related to what is called “digital banking”, that is, making loans by using a tick-box questionnaire based on analytics.

Like all old-timers in the sector, I believe lending is always best performed with eyeball contact and that algorithms and box-ticking are a dopey and ineffective alternative to the sort of questions, many not linear, that might be asked by a skilled moneylender sitting in front of a potential borrower.

Box ticking for decades has been gamed. It was gamed when banks tried it 40 years ago. Using higher margins to offset additional risk does not work in a recession. No amount of extra margin replaces the golden rule of recovering capital before calculating profit.

Heartland has a thoroughly good core, but I suspect it inevitably has discovered that the cost-saving box-ticking approach to small “Open for Business” loans works only in an economy stimulated by stupidly low borrowing costs. Free loans have never worked in a sector of the economy that relies on market disciplines. That is why career Beehive people or Ministry of Foreign Affairs mandarins should never be allowed to influence monetary policy or feign leadership experience.

Heartland has written off tens of millions, presumably creating a clean slate, its new chief executive now free to be judged by the next half-year result, rather than historical errors.

The retired chief executive Jeff Greenslade will not be offended. He would have observed the same rules when he took over the helm at Marac, whose balance sheet had all sorts of hidden rat holes that had never been previously discussed.

I expect Heartland to produce an impressive second-half result and I expect its quality Australian loan book, with few bad debts, will deliver chunky margins and nett revenues, helping to explain the Heartland board’s expectation that in 2028 the nett profit will exceed $200m.

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THE drop in share prices of so many leading companies again raises the fear of takeover, Heartland being an obvious candidate.

If Heartland’s share price does not adjust to its expected future profits it would be a soft target as its share registry is not dominated by the deep-pocketed institutions.  If its modelled 2028 nett profit is still realistic then its share price should be discounted for time and for the unknown risks that might undermine the plans. But the discount rate would be fairly aggressive if such a pricing formula delivered the current share price of 90 cents.

This problem – weak share prices making takeovers a credible outcome – afflicts many NZX-listed shares. Part of the issue will be the non-existent research performed on so many companies, not all of our fund managers having any skilled analysts. And of course the index funds have no budget, or skill, to form an opinion on a fair price.

It is easy to imagine that many chairs of listed companies will be contemplating how best to ward off aggressive private equity buyers.

Yet it is also fair to note that, globally, most markets are at stretched valuations that pay little heed to what returns the companies might be able to achieve in a messy world.

On February 25 2025, the year-to-date figures of some random global markets look like this:

S&P500 (US)  +1.73%

FTSE100 (UK)  +5.95%

TSX60 (Canada)  + 1.71%

BOVESPA (Brazil)  +4.25%

BYMA (Argentina)  -7.31%

Caracas (Venezuela) +52.63%

Euro Stoxx50 (11 European countries) +11.39%

DAX (Germany) +12.64%

SIX (Switzerland) -11.66%

ATX (Austria) +11.12%

Warsaw (Poland) +16.59%

ASX (Australia) +0.94%

NZX50 -5.62%

Jakarta (Indonesia) -5.23%

NIFTY 50 (India) -4.62%

NIKKEI (Japan) -3.88%

SET50 (Thailand) -11.74%

One might like to ask AI to explain why Germany, facing major change, would be amongst the best performers!

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PROPERTY for Industry Limited (PFI) is considering an offer of 5.5-year senior secured fixed-rate bonds.

Full details of the offer are expected to be released in the week beginning 3 March 2025.

PFI is an industrial property investment company in New Zealand, managing a $2.1 billion portfolio of high-quality industrial properties. The company has a track record of stability, with an occupancy rate of 99.9% and a weighted average lease term of 5.67 years. PFI has delivered steady earnings growth, supported by rental increases, strategic developments, and a disciplined capital management approach.

Although the interest rate for these secured bonds has not yet been announced, we anticipate a rate of approximately 5.30% per annum, based on current market conditions.

PFI will likely cover the transaction costs for this offer. Therefore, brokerage charges to clients are unlikely but will be confirmed closer to the offer opening.

If you would like to register your interest, pending further details, please contact us promptly with the amount you wish to invest and the CSN you plan to use.

Please note that indications of interest do not constitute any obligation or commitment to invest.

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Travel

Napier - Mission Estate - 6 March - Edward Lee

Napier - Havelock North - 7 March - Edward Lee

Christchurch – 12 March – Johnny Lee

Wellington – 19 March – Edward Lee

Lower Hutt – 25 March – David Colman

Auckland – 28 March – Edward Lee

Tauranga – 15 April – Johnny Lee

Hamilton – 17 April – Johnny Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners Ltd

Taking Stock 20 February 2025

INVESTORS with sensibly diversified personal portfolios will probably own shares in listed banks.

ANZ, NAB, CBA, Westpac and Heartland are all listed on accessible stock exchanges and at least some of these are in most of the portfolios our clients own.

They provide useful and reliable dividends and in time tend to grow in value, though Heartland’s recently-advised higher write-off provision has deferred any growth for a year or so.

The banks seem to be adept at quitting any lending to sectors that are clearly risky and are extremely good at minimising bad debts, Heartland’s announcement being an exception.

Historically they have all made mistakes, with Westpac and the BNZ the most egregious examples, the BNZ, in an era of boardroom lunches of pheasant and port, destroying itself with spectacularly stupid lending in Australia and to NZ corporate clowns, in the years before the 1987 market collapse.

Westpac has had two obvious major errors, the first an error of judgement in abandoning its reliable pharmacy clients, the second much more expensive, leading to enormous write-offs in billions, from a naïve blind rush into commercial and property development lending in the early 2000s, in pursuit of extravagant margins.

In one deal it erred childishly by lending more than a hundred million to developers on leasehold land at Albany. It then compounded its error by writing off the whole of its loan in a panic, rather than waiting the few years that expired before the land value was amply restored, as Albany grew.

Ah well, boys will be boys.

Having reminded readers of banking fallibility, I revert to my opening stanza that banks are generally good at differentiating dog manure from wholesome food. They certainly do not need any government or any law dictating to them those areas in which the banks should lend.

Dressing up such law as targetting “wokeness” is inane. Banks are never “woke”. They want to make every dollar they can, with maximum return for minimal risk, resulting in the maintenance of excessive salaries and unjustifiable bonuses.

If I owned a bank my mindset would be the same, in focussing on lending where risk and return were compatible.

As an example, I would lend to a gold miner if there were ample analysis assuring me that the miner could repay me as promised. If I disliked the risks in mining I would not lend.

I would be careful not to break any laws when lending. For example, when lending to a pharmaceutical importer I would take extra care to ensure the importer was not involved in the illegal drug world.

The current NZ First bill that it is hoping will be drawn from the hat believes that NZ can heavily fine or jail bank lenders who decommission loans on account of “wokeness”.

I wonder if the clowns that drafted this bill have ever considered how easy it is for a bank to justify any new lending policy without ever discussing someone’s definition of “wokeness”.

All it would need was its board to instruct its executives to focus more on one sector at the cost of another, the board assessing the better risk for return. 

Does any government, perhaps other than in China, Russia, Myanmar or North Korea, believe it can determine board lending policy? 

And there is one other reality to consider.

If BNZ drops off its lending to petrol stations all other bankers would look at their exposure and decide whether their bank had room to take over the loan (very probably at a higher margin).

The concept of “fining woke banks” is based on political childishness, perhaps vote-seeking.

We do not need governments dictating the private sector’s moneylending decisions.

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THE US banks illustrate neatly their autonomy over lending policies.

For a short while, the banks experimented with the idea of selecting staff, not on the basis of excellence and suitability for the task, but on the basis of race, gender, or personal lifestyle preferences. They also experimented with four-day working weeks and gave licence to staff to work from home.

Many of the larger banks have now declared these experiments were, in the words of one bank executive, “a fraud”.

They have responded by ending the experiment. They did not need Trump to guide them.

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ROBOTICS, artificial intelligence, healthcare and, in general, technology, are the growth sectors that every investor has enjoyed in recent years.

Some companies in those sectors have grown in value by multiples of hundreds, as the world turns to technology to solve its problems (decarbonisation), reduce cost, increase productivity, and increase longevity.

More motivated by reliable income, older investors, certainly in New Zealand, have sought income from the electricity, banking and telecom sectors.

All of this makes sense. Income matters more than growth, for many.

But other new strategies reflect a major change, as any reader may surmise.

Omitted from their solution is the sector that for decades has dominated wealth creation in NZ, a sector that provided reliable income with almost certain additional growth, thanks to inevitable inflation.

I refer of course to the property sector, which for more than four decades dominated investment strategies, with such extravagant, inflation-based gains, that even the most transparently incompetent people were assured of at least some gains.

If one reflects on the 1960s and 70s, one recalls how the likes of Brierley sought to take over companies whose land and buildings were used inefficiently, and thus had hidden potential, sometimes at immense multiples.

Brierley was never a clever company owner. He never illustrated skills in governance or execution (and should never have been made chairman of the BNZ).

He was clever at recognising "sleeping” assets, particularly land being used inefficiently, and was an unrepentant opportunist, a trader without constraints.

So for decades he and many other pretenders were feted by the media and politicians as business giants with special skills in adding value. Shareholders loved the gains. Takeover victims loathed the one-dimensional approach.

By the early 1980s, we had a range of Brierley lookalikes, most of whom were charlatans. There were at least a dozen property-based companies listed on the NZX, many priced as though water could be turned into a fine merlot.

It feels like dark comedy to look back on the era where trading properties was discussed in the same paragraph as building businesses.

The hardest question to have answered today is when all of this magic was finally revealed to hide the many examples of absurdity.

Was it the moment that no-skill syndicators entered the market in the 1990s, with various crooks and no-hopers paying top dollars for properties, using the funds of hoodwinked retail investors? Veteran investors will not need me to attach the names to the flash-car Harrys who fleeced investors.

Was it in the 2000s and 2010s when the new breed of “fund managers” arrived, syndicating properties and locking up the right to manage the properties, for the sort of fees that had often been hidden in the 1980s?

Was it the arrival of “valuers” who, I wondered, might be setting their fees based on what “valuation” the client required? 

Was it the earthquake rating people who fed the investor expectations, like the valuers charging a fee that one suspected related to the rating desired by the client?

Was it simply decades of extravagant valuations?

I recall a property owner explaining to me that if he owned three similar buildings on High Street each bought for $5 million, and then bought a fourth similar building for $10 million, it would be easy to find a valuer to value all four at $10 million, providing a “profit” that could be extracted by a new, higher loan from unwise money lenders.

The real answer to the question about what stopped the music might be economic reality, initiated by the global response to an epidemic - idiotic monetary policy. 

When the money printing stopped, inflation surging, inevitably interest rates became higher than the yields from rent. Suddenly households thought about nett reliable income and job security, rather than mindless consumption based on credit cards.

Suddenly there was no need for 200 cafes and takeaways and bars in High Street, and 50 retailers of dresses and trousers, and 50 retailers of brown goods and music earphones and electric bicycles.

Little companies found their clients could no longer live on tick.

Public servants could no longer hide in a corner to avoid being noticed.

Suddenly they were noticed and expendable. (Until the retirement Commission, and its like, have been disbanded this process will not have ended.)

As a result of these inevitable consequences of goofy policies, we had to notice that High Street had vacancies, at street level, and in the higher levels of buildings. Rent collection became a problem.

Properties are valued as a multiple of rents received, not a multiple of the rents that are planned to be received. Bankers lend on cash flow. Rents that are not being paid do not get coded as cash flow.

So bankers wanted loan reductions.

Building owners often found the equity they thought they had was no longer real. Few are ever prepared to test the bottom of the market by selling at auction.

Stupid property owners who had over-borrowed and spent their theoretical valuation gains on illiquid toys, Rolls Royces, 50-foot yachts etc, suddenly had unfriendly bankers.

 It has always been a truism that if you pledge an asset to obtain a loan you forfeit control of the asset at the whim of the lender.

We now see all of this untangling in residential property, commercial property, retail property and, though less so, in industrial property. Mortgagee sales and receivers are the norm.

Very few owners have enough wealth to continue with the 60-70% debt levels that worked only for as long as there were no tenancy failures and no big property devaluations.

As an asset class, property works now only for those with enough equity and enough bulletproof tenants to ensure continued, positive cash flow.

Is this change simply cyclical? It is slightly scary to imagine we might have a new order that recognises that rentals must be set sustainably.

I think of the owner of the building in High Street whose client, a restaurant, has been bankrupted. Down the road is another restaurant paying rents with ratchet clauses at a level that is now exceeding an affordable portion of his turnover.

At first opportunity would the surviving restauranteur not visit the owner of the empty space down the road and negotiate an offer of much lower rent, then return to his current landlord with a nice polite ultimatum?

How long before this example will become the norm in many different streets in many cities?

The property sector’s most intelligent and bulletproof participants are those NZX-listed trusts with low debt levels and tenants whose business models remain valid.

Those with government tenants seem safe, providing their debt costs are low, and providing we continue to have politicians and public servants using other people's money without the skills to persuade their landlords into rent reductions.

The modern portfolio of an investor who needs certainty of income is no longer able to apportion to property the levels of those times when ratchet clauses were accepted, and when rental agreements were signed without foresight.

Understanding the location importance is only one issue; getting long-term tenants is another; understanding and foretelling the new era when rentals must be related to nett, reliable tenant revenue is another. There are wise property owners who behave cautiously. There are far more who live for the day, without planning for changes.

You can bet that the banks are highly focused on this changing environment.

It might be the mostly greedy syndicators who are first in line for execution, but you can safely bet the lines awaiting their fate are three, four, five deep and will include those who believe that very low interest rates will bail them out.

As James Lee noted in his Taking Stock article last week, discussing Bitcoin, if an investor cannot understand how price equates with value, there is no obligation or need to invest, until the logical outcome is more obvious.

The property sector is now a component of an income-based portfolio only when the investor has done his due diligence and has worked out which property trusts are managed cautiously and insightfully.

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Thank you to everyone that participated in the ANZ 4.63% 5-year Senior Bond offer.

We have purchased an additional 100k of this bond so if clients would like an allocation please email our office office@chrislee.co.nz .

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FINAL reminder to Santana Minerals investors who hold options (with shares bought pre-March 2024). Exercise them now.  Now!

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Travel

Dargaville – 26 February – David Colman

Kerikeri – 27 February – David Colman

Whangarei – 28 February – David Colman

Wairarapa – 28 February – Fraser Hunter

Napier - Mission Estate - 6 March - Edward LeeNapier - Havelock North - 7 March - Edward LeeChristchurch – 12 March – Johnny Lee

Lower Hutt – 25 March – David Colman

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners Ltd

Taking Stock 13 February 2025

James Lee writes:

“We just don’t understand it, so we aren’t putting it in our portfolios”.

It was just prior to the Global Financial Crisis and the person presenting was a strategist at Credit Suisse private banking. He was talking about the fact CDOs (basically a pool of risky loans) had become so common that the majority of firms had some exposure globally, but Credit Suisse had missed out on the ridiculous fees involved because they just didn’t get it.

It was a remarkably honest comment and one that would be repeated around the office for years to come, as shortly after the failure of those loans became the start of the largest financial crisis in nearly 100 years.

What it taught us though, is that you need to understand the risk you are taking, regardless of whether everyone is already telling you to buy it. 

Bitcoin today is something that has gone from an obscure idea in 2008, once described by Warren Buffet as rat poison squared, to now an almost mainstream investment discussion, with Blackrock recently describing Bitcoin as a “transformative and diversifying asset” worthy of asset allocation.

Bitcoin’s history is a muddled mess, but it began life as an idea for a digital currency based around the notion that you could use a peer-to-peer network to store information of ownership that couldn’t be tampered with, with a maximum cap of 21m units to create a currency that couldn’t be devalued by issuance.

For the first five years, adoption was predominately the domain of niche technology players and criminals. Fun fact: famously the first commercial payment was in 2010 where someone bought with Bitcoin two pizzas. At today’s Bitcoin price those two pizzas cost $1B (with a B) US dollars; ten thousand Bitcoin.

Between 2010 and 2020 adoption grew to include private citizens who traded it daily, until in 2020 a tiny company called MicroStrategy decided that rather than hold their cash in US dollars they would buy Bitcoin. This was the first time the capital market was used to transfer institutional capital into Bitcoin.

Over the last four years MicroStrategy has bought $28B of Bitcoin at an average price of 63k USD, funding that by raising capital and debt from investors. As at today that $28B is worth $45B and the market capitalisation of MicroStrategy is $85B, but that is a story for another day.

The next phase came when in January last year Bitcoin ETFs were launched. They have been amazingly successful for the issuers who have seen over $100B of capital flow from traditional capital markets into this new frontier. A significant rationale for this money flow was investors betting that because Donald Trump suggested he may add Bitcoin to their potential reserves, Bitcoin would continue to climb. In fact, post it becoming evident Trump would win the US election Bitcoin has increased over 50%.

Recapping this, in 2008 the theory was you could recreate a global currency by creating a peer-to-peer network to record ownership of a thing with a maximum of 21M units. It never took off as a currency, but investors have bought Bitcoin on the basis a larger group than themselves would eventually buy it.

Initially niche technology advocates, then traders, in 2020 a corporate, in 2024 institutions; they are all now hoping the US government will in its eternal wisdom decide to buy Bitcoin.  Because it fails the test of it being a currency, i.e. it is not a generally acceptable form of payment, and probably never will be, the Bitcoin community now call Bitcoin digital gold or digital capital.

Bitcoin is digital gold. Really?

Bitcoin itself is not unique compared to other cryptocurrencies except for one key thing, acceptance.  It is this ethereal theme of acceptance because we think it has value, therefore it has value, that makes it such an emotional discussion. Could you imagine Warren Buffett describing a technology stock rat poison squared, Jamie Dimon CEO of JP Morgan calling a currency a fraud, and or could anyone imagine a listed company saying rather than keep cash to pay the bills it would keep their cash in Xero shares?

What Bitcoin has successfully done is convince many people that it is now not a currency but rather a generally acceptable store of value, comparing it to gold.  While gold has 5000 years of history of being a store in value and circa half of all gold demand is for Jewellery and technology, Bitcoin is really only 1 year old in the eyes of institutional investors and doesn’t have any other real use.

So what do we do?

The negatives have been shouted from rooftops since day one. It serves no purpose outside people trading it and calling it a store of value. It has no utility, the world wouldn’t stop revolving if it just didn’t exist, it’s expensive to trade, has such a finite supply that it actually couldn’t serve the purpose of being a store of value.  Those arguments have been thrown at Bitcoin since inception and yet it has gone from 0 to $100,000 a unit, making it the single best investment over the last decade, up 27,000%.

On the other side of the equation is the world’s most vocal advocate, being the Chairman (Michael Saylor) of MicroStrategy who preaches the adoption of Bitcoin (as well as being the largest owner of Bitcoin outside of the inventor).  Michael Saylor is very, very vocal on the topic, and it has been suggested to me many times that if you want to understand Bitcoin you should listen to Michael talk, so I did.

Saylor preaches the concept of adoption.  He has many wonderful analogies calling it digital energy, infinite life for an asset, and a cure for bad investments. One of his points I have empathy with, is in failing economies would they rather own a global asset like bitcoin rather than own their own worthless currency.  The obvious question is why bitcoin, and the answer is some countries aren’t allowed to buy US dollars, but they could buy bitcoin.  Unfortunately, failed currencies crash rapidly so an investor would have to correctly predict ahead of time that their currency would fail, and if they could do that, they would make a lot more money shorting that currency.

My favourite quote though is Saylor’s comment that Bitcoin is not a cryptocurrency but rather a digital commodity.  “There is no second best. Bitcoin is the only universally acknowledged digital commodity”, he says.

His argument seems to be that cryptocurrencies are solutions searching for a problem, but Bitcoin is different because it has adoption. Which brings us back to the start, the technological and legal differences aren’t what gives it value. What gives it value is the unique place it plays in terms of broader acceptance, which is a similar argument to gold.

Where gold and Bitcoin wildly differ though is the definition of universally acknowledged, alternative utility value, the ability to be replicated, and the emotional history we have with gold.

Which brings me to the fundamental point, what is the bet you are making when investing in Bitcoin?  Can you possibly understand the potential outcomes, and can you possibly value those outcomes? Which to me is the definition of investment risk.

For Bitcoin to thrive it will require: -

- Global acceptance by governments, as sovereign funds and pension funds globally will not allocate capital to Bitcoin unless their governments allow it, and frankly I still think many will not because intellectually many will just accept they don’t need to.

- Not to become a geopolitical issue.  Will China, Russia, India, Germany, Canada, Mexico adopt Bitcoin if the US goes first? If it was me I would adopt another cryptocurrency as I wouldn’t want to benefit the country trying to isolate itself from the rest of the world with Tariffs. To demonstrate this Idea, if the US bought every bitcoin at today’s price they would spend 2 Trillion with a T. Once they had 100 percent of them, why would anyone else buy them?  There would be no logical reason to acquire a Bitcoin because the only buyer from you would be the US government.

- No other cryptocurrency to be defined as a reserve.  Once the myth is broken that Bitcoin is the only digital commodity every crypto would try to redefine itself as a store of value. The allure would wear off.

- Nothing new comes out that is vastly superior. Bitcoin has significant limitations to be a reserve, not the least being the 21m units on issue. There just isn’t enough on issue for anyone to sensibly diversify for liquidity. For it to work as a reserve it has to be liquid enough that the acquisition and disposal of the asset doesn’t impact the value. Unfortunately for Bitcoin that is the opposite. They want the acquisition by the reserves to dramatically impact the value.

The way this limited size is controlled is evident in the gold market. Despite it being a $17T USD market, the US only has 4% of the total gold (6.7B ounces) in circulation, the next largest Germany has 1.5%, Italy, France, Russia, China own just over 1% and then its crickets.

Applying the same to Bitcoin would suggest the top 10 nations acquire less than 10% or 2m Bitcoin, which broadly is what has already been bought between MicroStrategy and the ETFs on the basis that others will adopt it. In fact the US already hold 1% of Bitcoin.

To round this all out: -

Bitcoin has gone up 27,000% in the last decade forcing people to look at it, yet it is possible for the general market to be completely wrong. It happens frequently. Just look at CDOs in the 2000s, so it isn’t a passive decision like Blackrock want you to believe. 

Bitcoin has a place in the world as a trading asset, no question.  The decision to buy it is not one about utility, it is about adoption. Do you believe more people, not less, will lose faith in traditional capital stores like shares/bonds/gold?  Will the US government borrow money to buy Bitcoin to hold as a reserve?  Will it limit that to just Bitcoin, or include others?  Will the US suggest 1% of reserves is the right amount?

To put this in context the US currently owns $20B of Bitcoin, compared to $30B of oil. The original gold reserve was only 9B back in 1971.

Bitcoin will go up as larger and larger groups adopt it as a store of value, but if that argument fails at any point the problem is where will be the next buyer on the way down.

Unlike gold, Bitcoin currently has no alternative use, it has no emotional history and currently its primary purpose is for traders to trade it, so the downside scenario isn’t something you can model.  If retail took Bitcoin to 20k, ETFs to 50k and the promise of Trump to 100k, how far could it fall if no one follows Trump?

It is impossible to ignore the Bitcoin discussion. It is a 2T dollar market making it larger than the Australian stock market. It trades 17T a year of value and has been the best performing asset in the last decade. The drivers are simple. Will governments adopt it as a store of value and in what magnitude?  The downside is simple - without adoption it is just a trading asset.

Therefore, it’s not a difficult asset to understand but it’s a really hard to value the ethereal concept of adoption.  The reality is for people wanting to trade, and loving to trade, it’s a great asset, but for clients who want to own things that have utility you can classify Bitcoin as a modern-day version of CDOs.  You don’t have to be there.

Travel

Lower Hutt – 20 February – Fraser Hunter

Blenheim – 20 February – Edward Lee

Nelson – 21 February – Edward Lee

Dargaville – 26 February – David Colman

Kerikeri – 27 February – David Colman

Whangarei – 28 February – David Colman

Wairarapa – 28 February – Fraser Hunter

Napier - Mission Estate - 6 March - Edward LeeNapier - Havelock North - 7 March - Edward Lee

Lower Hutt – 25 March – David Colman

Please contact us if you would like to make an appointment to see any of our advisers.

James Lee

Chairman-elect

Chris Lee & Partners Ltd

Taking Stock 6 February 2025

THE recovery of Synlait Milk is a credit to those who restructured its capital base and is of some small benefit to those who ignored the somewhat infantile earlier signals from the market and the media.

Synlait last week enjoyed a 20% share price rise after its new board advised that the company would return to profitability.

It also advised that the farmers who supply Synlait were to receive a bonus price. Many suppliers were now recommitting to retain their supply agreement, Synlait announced.

What a wonderful turnaround from the bleak market pricing and media coverage from just a few months ago.

My view is that the market and media never seemed to see the inevitable solutions that were available to a company with a real business.

Synlait Milk had real assets with a genuine value greater than its debt and a license to export to China that had a lasting value. It had some useless board members and had made the sort of goofy errors that others like Fletcher Building had made. It almost ruined the promising business case that its founder John Penno had envisaged.

When its board kept making amateurish errors its banking syndicate naturally reacted, threatening to reject a renewal of the loan facility, which in turn would have led to receivership and possibly liquidation, a disastrous prospect. But it was never likely. Synlait was a genuine business.

We all know receivers and liquidators rarely achieve real prices at asset sales they organise.

The outcome of a liquidation would likely have led to the two major shareholders, Bright Dairy (China) and a2 Milk (NZ), battling to see who could pay the least to buy back valuable assets from the liquidator.

That would have been a dreadful outcome for shareholders and, though it was unlikely, might have led to a shortfall available to the subordinated bondholders, who ranked ahead of the shareholders, but behind the banks.

The seminars we held around New Zealand last year clearly expressed the view that Synlait Milk’s business was real, that its balance sheet needed fixing, but that the bonds would not fail, and that the future for Bright and ATM would be defined by the support provided to Synlait. The two shareholders simply had to accept the need for more capital.

The market pricing of the bonds at the time was less than half the promised repayment value, and the shares were priced as though there was no value in the company.

That response of the “market” did not signal maturity or wisdom.

Synlait Milk’s new chairman, George Adams, put in the work, endured all the negotiations between shareholders, and is now dancing with delight, having presided over a successful recovery plan and the excising of some boardroom deadwood.

As an aside, why do directors with no history of value-add somehow retain the confidence of the major shareholders?

Synlait is now restoring its relationships with the farmers, its banks, its few remaining shareholders and, most of all, the market for its products.

There is a major caveat, however.

My expectation is that the rescuers (Bright and ATM) will get ALL of the rewards.

The heavily-diluted remaining shareholders will receive nicely written annual reports but will receive minimal if any of the surplus income. I believe Synlait should be de-listed, maybe by a takeover bid, at a modest price before any recovery has been established.

I expect Bright and ATM will exercise their right to price their contributions to Synlait Milk at a level that results in any “surplus”, any time soon, producing even a coin of dividend for the diluted minority shareholders.

Having rescued Synlait, Bright and ATM rightly occupy all the seats in the cockpit.

Accordingly, given my personal attitude to risk, I would prefer it if my portfolio included Fonterra rather than Synlait Milk.

I did not always have that opinion.

_ _ _ _ _ _ _ _ _ _

ONE of New Zealand’s smartest companies, Infratil, has been a short-term victim of Trump’s edicts.

The US President has included renewable energy in his definition of “wokeness” and has started to dismantle programmes that support “green” energy, including offshore wind farms.

Infratil has made large financial and philosophical commitments to renewable energy in the USA, signalling that, in particular, coal is not a desired source of energy.

Trump is promoting the use of American coal and is undermining “woke” solutions like wind and solar. His trumpeting is annoying Infratil, not to speak of those who believe it is their job to rescue the planet from carbonisation.

Infratil has also committed to energy generation for artificial intelligence (AI) computing needs, building more data centres.

Of course last week China displayed an ability to develop AI without excess energy requirements.

Nvidia, the US giant which makes the tiny super-chips needed by AI computing, was immediately re-priced by fund managers, falling 17% from its grossly exaggerated share price height. In so doing, it sliced many billions from the value of the NZ Government’s Superannuation Fund, whose biggest single investment is Nvidia.

The same fund has a huge investment in Infratil, so a further sum was devalued when Infratil’s share price fell by around 7%.

The intervention that, at least for now, damaged these share prices was not really Trump, who at most will preside for only four more years, in his idiosyncratic, some would say idiotic, manner.

The real news was that Chinese competition has surfaced.

Our chairman-elect, James Lee, wrote in Taking Stock before Christmas that some ballooning US technology share prices appeared to overlook the certainty of imminent competition that would bring reality to expectations about future profits and share price values.

In time James will discuss this in his own words, but in essence he was noting the inevitability of competition for the likes of Nvidia. His words were timely, if not prophetic.

Markets had been pricing America’s technology stocks as though their advancement was linear and would inevitably lead to perpetual financial successes.

James’ global network after a stint as CEO of NZ’s best investment bank has ensured he has a fairly handy base from which to understand asset mis-pricing by those often investing other people’s money. His warning of the inevitability of competition to reduce margins and market share, thus leading to more realism in share pricing, came just a few weeks before the Nvidia price had to be recalibrated.

He will write Taking Stock for next week. His perspective should remain on clients’ reading list.

_ _ _ _ _ _ _ _ _ _

IF ANY future government is to sell a state asset, the asset I would most wish to buy would be the credit collection function of the Inland Revenue Department.

Heaven knows it needs a private influence to put an end to its remarkably complacent attitude towards collecting money from its debtors.

I will revert to this theme later in this item but let me begin by illustrating a crucial truism.

As a schoolboy, my obsession for sport led to holiday jobs as a greenkeeping worker at an eminent golf club. I worked in a team of two, cleaning up messy areas, including a bunch of fallen trees in which existed a million wasps that I disturbed. That is another story that ended in a bath of vinegar.

Anyway, my workmate was a terrific golfer but a crazy gambler. He died at a young age, having wasted his talent, but that is also another story.

He told me many stories of his gambling successes, one being of an occasion in the 1960s when he was asked by an elderly neighbour to take on course a sum of 30 pounds, and to place all of it on one horse in the first leg of an on-course double.

In those days, he would have received on her behalf 30 tickets, to spend across the second leg of the double, if his neighbour’s pick won the first leg.

It did. It paid around 25 pounds to win.

She had instructed him to use the 30 tickets to put two pounds on each and every one of the 15 runners in the second leg. She would then be certain of receiving a handsome collect.

My workmate by the time the second leg was scheduled had lost all of his money.

He looked at the second leg starters and decided not to put two pounds on each of some of 15 runners, but to put three pounds on the 10 horses he felt had a chance to win and thus use her tickets to fill his pockets.

With 100 yards to run none of his ten choices were in front but on the line one of the ten succeeded, at long odds, so the double (of about 300 pounds) was collected three times, two for his neighbour, one for himself.

He rejoiced in telling the story.

I asked him how what he had done was not theft? Even a teenage schoolboy could see that. What would he have done if none of his ten picks won? He rarely had enough money to pay for his own 7oz Red Band.

How would he pay her the money she was due? What was his solution?

Fly to Brisbane the next day, was his reply.

This long story is to illustrate the dishonesty of using other people’s money illegally, and the fallacy of believing that, because, after use, by giving the real owner the money due, dishonesty was somehow reversed or forgiven.

This is where the Inland Revenue Department is relevant.

In recent months the IRD has been the cause of nearly 75% of all liquidations and receiverships in that period.

The IRD has got angry about businesses that do not pass on to the IRD the GST, the PAYE and/or the staff KiwiSaver contributions that the business had collected on behalf of the IRD.

Instead, many businesses have used these monies for their own purposes, paying creditors, buying stock, paying wages, paying dividends, paying bonuses or lending to shareholders/owners, maybe to buy toys.

Businesses are contracted by IRD to collect GST at the rate of 15% on virtually all products or services, and to pay all GST collected to the IRD on defined dates.

The money at NO stage belongs to the business, or its owners. The money is held IN TRUST on behalf of the IRD, in effect.

Similar obligations apply to PAYE tax and to KiwiSaver contributions.

Not to pay on a due date to the IRD is a default and must, indeed should, incur penalties.

I ask the question; what would a private business do that was owed money on a defined date, and was not paid? We know what the IRD does. It adds on penalty interest and years later calls in a liquidator.

I know what I would do if I bought the right to be its tax collector.

I would contact the client, point out the error, and agree to an immediate remedy, such as payment tomorrow AND would monitor the remedy, reacting strongly if the new commitment was not met. More delays would be intolerable.

A private business owner would not succeed in building his business if he did not respond in this way. Within a week, I would be calling or visiting the failed business every day and unless it adhered to its catch-up promises, I would be invoking my legal rights.

Most of us would call this “credit control”.

So here is my point.

In recent liquidations, apparently most of which were prompted by the IRD, countless bars, cafes, restaurants, retailers, property developers, and used car lots have been put into some sort of administration.

Almost every time the IRD was a major creditor, often owed millions or hundreds of thousands by small businesses who defaulted on GST, PAYE or KiwiSaver contributions for months or years.

How could this be? Surely after just one missed payment the IRD would behave like a business owner and would act brutally to any example of misuse (theft) of money held on its behalf.

We now read of how “unreasonable” it is of the IRD not to “settle” by “forgiving” some of the debt used. What piffle. Without some other agreement in place, trading on with the IRD as “the bank” is theft.

The obvious question to ask is why theft is not reported within days unless an agreed restoration is promised, monitored and executed?

The IRD needs a new mentality. It has the means to stop itself being robbed while the debtor uses cash flow as though all of it was its own, to use as it pleases.

Theft, in my opinion, should lead to jail, to public disgrace, and to being banned from the privilege of obtaining credit from others, or running any limited liability company.

Does the IRD need to contract to the private sector the duty of collecting its dues? By the evidence currently available a large new listed company would make impressive revenues by introducing private sector disciplines to the IRD collection process.

_ _ _ _ _ _ _ _ _ _

Travel

Christchurch – 13 February – Fraser Hunter

Lower Hutt – 20 February – Fraser Hunter

Blenheim – 20 February – Edward Lee

Nelson – 21 February – Edward Lee

Dargaville – 26 February – David Colman

Kerikeri – 27 February – David Colman

Wairarapa – 28 February – Fraser Hunter

Whangarei – 28 February – David Colman

Napier - Mission Estate - 6 March - Edward LeeNapier - Havelock North - 7 March - Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

(I will publish my planned travel dates as soon as I am clear to do so)

Chris Lee

Chris Lee & Partners Ltd