"Buses on the road to ruin" Standard Writer Gives a Snarky Response.....

I sent Mr. Dennis Cheong an email [the writer's name and emails are attached to each story] alerting him that I had posted on his piece on franchise bus operator Kowloon Motor Bus the other day. His response to me:

Dear Mr. XXX,

I regret to say my report was accurate and whether it is flawed is a subjective judgment. Whether a profit margin of 11.3% and a return on shareholders' funds of 17.1% are high is debatable. If his statements are inconsistent, an educated reader, just like Mr. PXXX, will be able to quickly point out. By the way, are you a true believer in the free markets?

Regards,
Dennis Chong, The Standard

Ok. Let's have a debate as to whether-or-not Mr. Chan's assertions that KMB returns on investment are low by Hong Kong Standards and whether-or-not strict return data is subjective or can be objectively judged. Firstly, Mr. Chan states that return on investment is 6%. Where does he get that number? I think that he pulled it out of thin air. Essentially a lie. The number that I calculate is that KMB earns a 17.1% return on equity, also known as shareholder's funds in the Hong Kong lexicon of business terms.

I use Return on equity [ROE] since it is one of the most powerful tools for measuring a company's profitability against investment. Return on equity is defined as follows:

One of the most important profitability metrics is return on equity [or ROE for short]. Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet

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So, we can compare this metric objectively against other enterprises in Hong Kong or the general market.

I could find no market estimate of ROE but found that the average PE ratio of the Hang Send Index to be about 15. Assuming that these shares trade at 2.5 times book value [a lower book value multiple gives a lower ROE, so I figure that using 2.5x is conservative], I get a ROE= 16.7% as an average for the market.

In other words, assume that the average share price is $4. Then at a PE of 15, the average company earns $0.2667 per share and has a book value of $4/2.5=$1.60. So therefore, ROE is $0.2667/$1.60= 16.67 or 16.7%.

Lets look at some examples of ROE in 2004 and since KMB is a franchise bus operator, with limited competition in their space, I include many examples of other regulated monopolies:

HSBC= 15.5%
HK Electric= 16.6%
HK Ferry= 12.1%
MTR= 7.1%
Hutchinson= 6.1%
CLP= 18.6%
China Mobile= 18.2%
Petrochina=27.6%
PCCW=3.0%
Cheung Kong= 6.1%

I can go on-and-on but I think that it shows that KMB'es ROE is not out of line with the rest of the market as Mr. Chan remarked. Except for Petrochina whose ROE is very high at 27.6% and we know what happened to oil prices as of late! This is not a subjective evaluation in my opinion and it is reasonable to conclude that KMB earns a respectable return as they reported in their annual report relative to other large listed companies. I repeat the unchallenged assertion made by Mr. Chan in your article.

Although the company made a profit of HK$730 million last year, that was far from satisfactory for a listed company, Chan said.

``Our rate of return is about 5-6 percent,'' he said.

I say that he is feeding the Standard bullshit and the writer took this line of crap hook, line and sinker.

And it is also important to note that franchise bus operations are somewhat akin to a regulated monopoly. I have to admit that I do not know the ins-and-outs of this business but the returns do not seem to be out of line with those of other regulated monopolies here in Hong Kong or even the rest of the world in general.

So, I continue to be troubled by your reporting on this matter. It is as if the tycoons here in Hong Kong get to air their grievance's and can essentially make up numbers and make unsubstantiated claims without argument from the press. I take issue with his remarks and I also take issue with your conclusions as the title of your piece outline, "Buses on the road to ruin." The argument that franchise buses in Hong Kong are facing trouble is just not borne out by the facts.

I also take issue with your comment to me...

By the way, are you a true believer in the free markets?

Do you think that by my questioning false and unsubstantiated claims made by tycoons, that I am not a believer in free markets? Do you think that all regulated utilities should be able raise rates and charge what the market will bear? I don't think that you will find too many people thrilled with the prospect of that happening. Look under my name above...federalism, free-markets and the liberty to let one's mind wander. I do think that you will find if you dig enough, that Hong Kong competitive markets are hampered by a handful of greedy tycoons that constrict competition that keeps prices and their own prices and profits higher than they would be under true free market competition. And if you read my other economic related posts, maybe you could answer that question for yourself but I will continue to comment on this when I see it.

All I ask as a reader and as a resident here is that there is a lively debate on fact and I do not think that your article meets even the basic criteria of being newsworthy. I see it as only a puff piece and one that serves the needs of the greedy tycoon community and not the people of Hong Kong. Shame on the Standard for this.