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Veto Aeon Credit loan to parent
22nd January 2013

AEON Credit Service (Asia) Co Ltd (ACSA, 0900.HK) has too much money. How do we know this? Because on 11-Jan-2013 it announced a proposal to lend up to HK$600m to its immediate parent company, AEON Credit Holdings (Hong Kong) Co., Ltd (ACH), using part of its unused borrowing facilities, for 3 years, the maximum period allowed for ongoing connected transactions under the Listing Rules. The proposal, unless withdrawn, is subject to independent shareholders approval at an EGM to be convened soon.

The loan is equivalent to about 28% of its shareholders' funds of $2,144m at 20-Aug-2012. ACH is 100%-owned by AEON Credit Service Co., Ltd. (ACSJ, 8570.JP) of Japan, which in turn is 45.63% owned by AEON Co., Ltd (AEON, 8267.JP). AEON also owns 71.64% of AEON Stores (Hong Kong) Co., Ltd (ASHK, 0984.HK).

Loans to controlling shareholders are always a bad idea. The controlling shareholder, through its power to control the composition of the board, can in practice decide whether to repay the loan or seek rollover. If a controlling shareholder gets into financial difficulties, it is more likely to repay its bankers than it is to repay a company it controls. Its bankers may even have a security pledge over the listed company's shares.

If a company has surplus capital beyond its foreseeable requirements, then the golden rule is that this should be returned to all shareholders by way of a dividend, not to one shareholder by way of a soft loan. Loans to controlling shareholders are an abuse of company funds.

ACSA is in the business of consumer credit, on which it normally makes a decent spread. In the year to 20-Feb-2012, it had interest income of $1,010m and interest expenses of just $118m, on outstanding loans of $4775m. That's an average interest rate of about 21% on the loans, ignoring the near-zero rate on time deposits. But for a loan to its parent, it proposes to charge only 0.75% above its unspecified "Cost of Funds", which is probably only about 2% p.a.. ACSA says that "the Company" (presumably, its directors) "considers it desirous to grant the Loan Facility to ACH to generate a reasonable return for the Group". Desirous for ACH, perhaps, but not for minority shareholders, given the risks involved.

Setting aside the issue of whether lending money to a controlling shareholder is a bad idea, the terms are lousy. ACH does not even offer any security, and the interest rate is not reasonable compared to the rate on consumer loans. If ACH wishes to borrow money, then it should go directly to the banks and pay market rates.

Another concern for ACSA shareholders is what this says about the parent's strategy in greater China. ACH wants to use the money to invest in its own "PRC Business" outside of ACSA, defined as micro-finance, leasing and consumer finance. That puts it into competition with ACSA, and reduces the potential for ACSA to expand beyond its mature HK business. ACH also has wholly-owned subsidiaries in Taiwan doing credit cards and hire purchase. If AEON wishes to regain investors' confidence after this proposal is either withdrawn or defeated, then it should announce a consolidation of all its greater China business into ACSA and sign a non-compete undertaking, removing the conflicts of interest.

Who can vote

ACSA is owned 51.94% by ACH, 13.37% by ACSJ and 0.90% by ASHK, so that is a total of 66.22% that cannot vote, leaving independent shareholders with 33.78%. Of this, latest disclosures show that at 29-Jun-2012, DJE Investment S.A. (DJE) held 8.01%, and at 20-Nov-2009, Aberdeen Asset Management (Aberdeen) held 8.00%, a combined 16.01%, almost half of the float. So if they both oppose the deal, then it should fail, while if one opposes and the other supports, then the matter will be decided by other public shareholders. Incidentally, the bulk of the DJE holding is in the LuxTopic Pacific fund, which also has a holding in ASHK, another over-capitalised member of the AEON group, and these are the 1st and 3rd-largest positions comprising about one sixth of the fund, so they have a big interest in getting this right.

Tight timing

The announcement was filed at 22:59 on Friday 11-Jan, just one minute before the HKEx filing system shut down for the weekend, minimizing publicity (until now). The target date for sending out the circular is Fri-1-Feb-2013, in which case the 14-day notice period would include the first weekend followed by the 5-day weekend of Chinese New Year (9-13-Feb). The notice period must be at least 14 clear days, excluding the day of the notice and the meeting, so the meeting could be held on Sat-16-Feb or later. Proxy forms have to be filed 48 hours before the meeting, potentially meaning 9 a.m. on Thursday 14-Feb, the first day after the holidays, which in practice means they would need to be filed before the holidays, by Friday 8-Feb. Add on a couple of days for mailing time, and for custodians to transmit instructions to sub-custodians and then to the registrar or CCASS, and you end up with a voting window of only 3 working days from 4-6-Feb.

Action required

First, via this article, Webb-site calls on ACSA to withdraw this outrageous proposal and apologise with deep bows for insulting investors' intelligence. This family-first approach, where parent companies raid the savings accounts of their listed children, may be the way things are done in Japan, but it is unacceptable corporate governance in Hong Kong. Imagine the uproar if Li Ka-shing were to seek to borrow a quarter of Cheung Kong's net assets as ACH is doing with ACSA.

Second, we urge ACSA to immediately declare a special dividend, payable as soon as possible, of at least HK$600m, or at least $1.44 per share, which is clearly an amount which it has available as unused borrowing facilities. ACH will get its fair share of this.

Third, ACSA should announce that it will be the vehicle for AEON's credit business in greater China and propose reasonable terms for the injection of all competing businesses into ACSA, together with a non-compete undertaking from AEON and ACSJ.

If ACH ignores this call and sends out the circular, then in the interest of fairness we urge them to extend the notice period to include at least 10 clear business days in Hong Kong, in accordance with Provision E.1.3 of the Code on Corporate Governance, and we urge the Stock Exchange Listing Division to require this, otherwise shareholders will not have a reasonable opportunity to vote. We also urge all independent shareholders, including Aberdeen and DJE, to vote against the proposal and protect themselves and their clients from abuse, and to vote early, avoiding the risk of failed instructions caused by the Chinese New Year holidays.

Webb-site.com, 2013


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