The Real Story Behind Blumont, Asiasons And LionGold

Last Friday, three shares – Blumont Group (SGX: A33), Asiasons Capital (SGX: 5ET), and LionGold Corp (SGX: A78) – were suspended from trading by the Singapore Stock Exchange after experiencing falls of 40% to 60% that were preceded by rapid increases in their share prices.

Since then, the trading suspensions have been lifted. But, the carnage has continued. As of Tuesday’s close, Blumont, Asiasons and LionGold have dropped 94%, 96%, and 87% respectively from their closing prices on last Thursday.

While investors might be wondering what really transpired behind the scenes to cause the three shares to plunge, the real story can be traced back to 2007.

A painful loss

The debacle involving those three shares prompted a friend of mine to share with me a digital newspaper clipping that was published on The New Paper back in Oct 2007.

The story was about a lady named Dawn Zeng who had lost S$55,000 while speculating on penny stock Uni-Asia Finance (SGX: C3T). She bought the stock on a tip that it was “hot”, and “didn’t know anything about [the company].”

She bought 50,000 shares of the company at a price of S$2.20 on a contra-trade, which meant that she would not be required to pay for the shares until three days later. Her initial plan was to sell those shares within those three days, hoping to make a profit on the expectation that Uni-Asia’s shares would continue to rocket.

The company went public on August 2007 at an offering price of S$0.55 but had quadrupled in value to a high of S$2.79 by 15 Oct 2007. Its sharp ascent was what made it “hot” and attracted speculators like Zeng.

But the fundamentals of the company weren’t robust enough to sustain those share prices and soon enough, it fell to a low of S$1.00 on 25 Oct 2007.

In the interim, Zeng was forced to sell her shares at S$1.10, booking a total loss of S$60,000. She had to pay-off that sum of money with five years’ worth of savings that she and her finance had accumulated. Even their upcoming wedding on Feb 2008 had to be postponed as their savings had been wiped out.

And all that happened because of a single speculative bet that went wrong.

The lessons to be drawn

So there we have it, Zeng’s story with speculation that ended on a sorry note. And if we dig in further, there are strong parallels to be drawn with what happened to Uni-Asia and the trio of Blumont, Asiasons, and LionGold.

There was the strong price ascent prior to their share price collapse: Uni-Asia’s share price gained 407% in two short months; Blumont was at six cents on Aug 2012, and had hit a high of S$2.45 (an increase of 3980%) barely a year later on 30 Sep 2013; Asiasons’ price grew 197% in just nineteen days from 1 Sep 2013 to 19 Sep 2013; LionGold had increased in value by 50% from 1 Aug 2013 to 27 Aug 2013.

Then, there were the stretched valuations that these shares had. Uni-Asia was valued at 39 times its historical earnings at its peak of S$2.79; Blumont was selling for 500 times its trailing earnings and 60 times its book value at some point prior to its collapse; Asiasons carried a price-earnings ratio of 583 before last Friday’s shellacking; as a company, LionGold did not even have any profits to speak of for its last 12 months and yet carried a market value of S$1.42b on last Thursday.

So, we can see that six years ago there was a company – carrying an inflated share price that’s hard to justify with its business fundamentals – that collapsed suddenly in price after a sharp run-up. What happened with Blumont, Asiasons, and LionGold is not new.

While there can be many technical reasons for the collapse in share prices for those four companies – conspiracy theorists might even point to price manipulation – I’ve written before that “there are times when it will be obvious that a share price is over inflated. In cases like that, the simple solution is to just walk away.”

But for an investor to just simply “walk away” there has to be the recognition that over the long-term share prices are driven by the fundamentals of the business. And that, is the real story behind Blumont, Asiasons, and LionGold.

It was very likely that there were market participants who bought into the shares of the trio while blindfolded, betting on a price increase simply because its price has risen before. There was simply no recognition of the fact that the fundamentals of a business are what sustains the price of a share over the long-term.

Blind-betting might work for some, but it’ll likely end up in disaster for many, with Zeng being just one such example.

Foolish Bottom Line

Investors have to realise that over the long-term, the shares of a company are only worth as much as the aggregate amount of profits and cash flows that its businesses can make over its life-time. Without strong fundamentals – competitive positions, cash flows, profits, assets, dividends etc. – there’s no way high share prices can be sustained.

It’s a message you might find me repeating many times over here at The Motley Fool Singapore. But I’ll run the risk of sounding like a broken radio. It really is a message that’s worth harping on, and on, and on….

http://www.fool.sg/2013/10/09/the-real-story-behind-blumont-asiasons-and-liongold/