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Hong Kong Building and Demolition
10th December 2009

Hong Kong Building and Loan Agency Ltd (HKBLA, 0145) has been a perennial cash shell, bouncing around the market between different controlling shareholders for several years without doing very much inbetween. Now, its foundations appear to be under threat as its cash pile gets depleted on dubious transactions. It appears to have become part of a network of companies which also involves:

Investors should avoid all these stocks.

Three takeovers

First, a brief recap of the changes of ownership.

Bid 1

On 18-Jun-05, Lippo China Resources Ltd (0156) agreed to sell 74.8% of HKBLA to United Asia Finance Ltd (UAF) for HK$184m, or about $1.0932 per share. UAF was a private HK company which was 50.91% owned by Allied Group Ltd (0373), 7.27% owned by Sun Hung Kai & Co. Ltd (0086) and the rest by 4 other shareholders. SHK was in turn 74.99% owned by Allied Group. The price represented a premium of about $20m, or about 12%, to the net asset value of about $0.97 per share at 31-Dec-04. The deal completed on 12-Sep-05, triggering a general offer.

Bid 2

On 11-May-07, UAF agreed to sell 74.99% of HKBLA for $1.475 per share, or about $248.9m, to Mercurius Partners, LLP (Mercurius), which was wholly-owned by John Zwaanstra and his family. The price was a premium of about $75m, or about 43.2%, to the net asset value of HKBLA at 31-Dec-06 of $1.03 per share. $20m was paid on signing, and the rest on completion on 31-May-07, triggering a general offer.

Bid 3

On 21-Aug-09, Mercurius agreed to sell 75.00% of HKBLA to Nelson Tang Yu Ming (Mr Tang) for $308.8m, or $1.83 per share. 10% was paid on signing, 30% a week later, and the rest on completion on 25-Sep-09, which triggering a general offer. The price was a premium of about $137m, or 79.4%, to the net asset value of $1.02 per share at 31-Dec-08.

As you can see from the above 3 deals, the listing value of a shell in HK, in terms of the premium over book value, has been on the rise.

Mr Tang is the MD of Shikumen Capital Management Ltd and a responsible officer of Shikumen Capital Management (HK) Ltd (Shikumen). Until 31-Jan-07, he was a licensed representative of PMA Investment Advisors Ltd. Shikumen was incorporated on 1-Jun-07 and commenced licensed operations on 7-Sep-07 with 3 Responsible Officers: Mr Tang, Ulric Leung Yuk Lun, formerly an RO of SAIL Advisors Ltd, and  Jeffrey Lau Chun Hung, formerly a Representative RO of Och-Ziff Capital Management Hong Kong Ltd.

Under new management

When the takeover was first announced, Mr Tang intended to become an executive director of HKBLA, but on 2-Oct-09 (when the offer document was posted) he was appointed as a non-executive director. He also nominated two EDs, Mr Chan Chun Wai and Wilson Lau Yu Fung, and three INEDs: Lawrence Yu Kam Kee (Mr Yu), Mr Chan Chi Yuen and Au Tin Fung (Mr Au) who were appointed on the same day.

Two of these people have a connection to CPP: Mr Chan Chun Wai and Mr Au were both appointed as INED of CPP on 27-Aug-07.  We warned readers about CPP in our article on 3-Jul-09. Mr Chan resigned on 7-Aug-09 "due to the increase in his own business commitment". Mr Au resigned on 30-Sep-09 "due the the pursuit of his own business". They weren't too busy to join HKBLA though.

Mr Au was also an INED of China Fortune (formerly China Conservational Power Holdings Ltd) from 23-Dec-05 to 10-May-06. Mr Chan Chi Yuen is also an INED of AEL (formerly China Sciences Conservational Power Ltd) since 30-Sep-04. As you can guess from the former names, the two companies were once related.

On 20-Oct-09, 3 days before the offer closed, 56m shares were withdrawn from CCASS from the account of Sun Hung Kai Investment Services Ltd (SHKIS), which is a fellow subsidiary of Sun Hung Kai Financial Ltd, which made the offer on behalf of Mr Tang.

Mr Au wasn't independent of HKBLA for long - he became an executive director on 23-Oct-09, as soon as the takeover offer closed, leaving the company with only two INEDs. The Listing Rules require three. Mr Tang became non-executive Chairman on the same day. Only 0.26% of HKBLA was tendered to the offer, giving Mr Tang 75.26%. He only needed to sell the 575,000 tendered shares to restore the float, but on 4-Nov-09 he launched a placing via SHKIS, selling 56.5m shares (25.12%) at $1.83, cutting his stake to 50.14%.

It appears that SHKIS passed the entire placing on to Kingston Securities Ltd (Kingston), which disclosed an interest in 56.5m shares effective 6-Nov-09, disposing of it on 10-Nov-09.

The placing completed on 10-Nov-09, when our CCASS Analysis shows shares moved from SHKIS to Kingston. However, on 6-Nov-09 Kingston had already taken delivery of about another 56m shares from SHKIS, possibly shares which belong to Mr Tang. So as a result, 73.89% of the company is in CCASS, but the top 10 CCASS accounts hold 68.53%. We suspect there is very concentrated ownership.

The withdrawal from SHKIS on 20-Oct-09 and the transfer from SHKIS to Kingston on 6-Nov-09 suggest that Mr Tang may have pledged all his shares - otherwise why not leave them with SHKIS?

Unsecured advance of $58m to a BVI shell

On 9-Nov-09, HKBLA made an unsecured advance of HK$58m as "earnest deposit" to a BVI company, the owner of which was not disclosed, in relation to a possible investment in the equity or debt of New Smart Financial Group Ltd (NSFG, HK), for which there is not yet any contract, only an MoU. NSFG is purportedly "part of a credit guarantee joint venture in the PRC". This appears to be a start-up, because a check of the HK registry shows that it was a shelf company incorporated on 27-Mar-09 and adopting its present name on 19-Jun-09, less than 5 months before this announcement.

You might think that HKBLA should at least have obtained security over Target's shares, but it didn't, and nor was the money placed in escrow.

Investment of $70m in Byford

On 30-Nov-09, HKBLA acquired 119.3m shares (4.97%) of Byford "in the open market" for $70.4m, or about $0.59 per share. We warned readers on 1-Jun-09 about the Byford Bubble and on 18-Sep-09 about a 100% margin loan it had made to an anonymous BVI company. The stock remains in a bubble, closing on Friday with a share price of $0.62 and a market cap of $1.49bn compared with net assets of just $90.9m at 31-Jul-09, or about $0.038 per share.

Our CCASS Analysis service shows that the shares purchased by HKBLA moved from the custody of Fortune (HK) Securities Ltd (Fortune Securities, which is owned by China Fortune) to Kingston Securities Ltd on the settlement date of 2-Dec-09. The controlling shareholding in Byford is pledged to Kingston Finance Ltd, a sister of Kingston Securities.

The gross assets of HKBLA at 30-Jun-09 were $232.5m, so the investment acquired represents 30.3% of gross assets, which is more than 25%. You might think that would make it a Major Transaction under the Listing Rules, but it doesn't, because when the company is buying shares, the Listing Rules look at the attributable gross assets underneath the shares, and since Byford is a bubble stock, the attributable assets are far less than the purchase price.

Policy issue: this is a yawning gap in the Listing Rules - the class tests in Chapter 14 should look at the purchase price relative to the listed company's assets - that's what costs shareholders their money.

So why did HKBLA buy Byford shares?

"In consideration of the possible investment in energy and natural resources related business and the recent market price of Byford, the Directors consider that the Acquisition would enable the Group to generate a good return and capture the potential capital gain in the future."

Byford is no PetroChina. The most that can be said about the shell's "energy and natural resources related business" is that on 19-Aug-09 it signed a non-binding MoU with a BVI company called New Success Asia Ltd, the owner of which was not disclosed, in relation to "making equity investment, setting up joint venture, financing and/or providing technical assistance in the Projects". And what are the "Projects"? This word was defined as "NSAL has entered into an exclusive option agreement with [an entity, for which no English name was given] in relation to an investment in energy and natural resources related business". Over 3 months later, nothing more has been said about this.

Ni Rong Kun

On 1-Dec-09, an individual called "Ni Rong Kun" acquired 11m shares (4.91%) of HKBLA in an off-market transaction at $3.20, increasing his/her stake from 4.80% to 9.71%. Ni Rong Kun is also a subscriber of $25m of convertible bonds (with an option for $25m more) in the $300m/$600m issue by Value Convergence Holdings Ltd (VC, 0821), in which China Fortune is also a $100m/$200m subscriber. For more on VC, see our separate story today.

Mr Yu resigns for a novel reason

On 2-Dec-09 Mr Yu resigned as INED of HKBLA "due to his intention to concentrate on his own business for unexpected engagements". What on Earth does that mean? Is he in the business of unexpected engagements? He only served for 2 months. His departure left only one INED. Whatever the reason for his resignation, he's still got 4 other listed company directorships.

Cash dwindling fast

At 30-Jun-09, before the change of management, HKBLA's interim report shows net assets of $231.7m or $1.03 per share, including $189m of cash and $34m of mortgage-backed securities. That cash has been rapidly depleted by the unsecured "earnest deposit" and the investment in Byford's bubble stock, absorbing about $128m, so there's probably only about $61m of cash left, or $95m if they have liquidated the mortgage-backed securities. Of course, HK does not have quarterly reporting, so the next time you see a balance sheet will be some time in the spring of 2010.

Despite this, HKBLA closed yesterday (9-Dec-09) at $3.45, valuing the company at HK$776.3m, or about 3.35 times the last published net assets.

Webb-site.com, 2009


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