We look at the background of Asian Citrus, owner of a former Tropicana orange plantation in Guangxi, whose lease was terminated in mysterious circumstances, and the chaotic HK debut last week in which HK$291m changed hands at inflated prices. In response to numerous investor e-mails we consider what action they might take. The HK Law Reform Commission has proposed allowing class actions - add your voice to that.

Asian Citrus fiasco
30 November 2009

This article responds to numerous e-mails Webb-site has received from people who bought shares of orange-grower Asian Citrus Holdings Ltd (Asian Citrus, 0073.HK, ACHL.L) at inflated prices on its HK debut last week.

Company background

Asian Citrus was admitted to trading on the Alternative Investment Market of the London Stock Exchange on 3-Aug-05. Its Chairman, CEO and 34.65% shareholder is Mr Tony Tong Wang Chow (Tony Tong). The group's first orange plantation (which was acquired in established state) is 30.9 sq km in Hepu county, Guangxi province. The second, which the group established, is 37.1 sq km in Xinfeng county, Ganzhou, Jiangxi province. A third, under development, is in Dao county, Hunan province.

Reading the 2005 AIM admission document and the HK listing document together reveals some inconsistencies. The 2005 document says

"In late 1999, in order to encourage foreign investment in Hepu county, the Hepu Government approached Mr Tong Wang Chow..."

The 2009 document says:

"In 2000, the Hepu Government appointed Mr Pang Yi (who was previously an employee of a state-owned company in Hepu who left his employment in 1997) to find a suitable Hong Kong investor to invest in and operate the Hepu Plantation...As the Hepu Government had requested for a Hong Kong investor, Mr. Pang Yi invited Mr Tong Wang Chow..."

So which is it, 1999 or 2000? And who approached Mr Tong, the Government, or Mr Pang Yi?

Mr Pang Yi was formerly the "investment service supervisor" of Guangxi Zhuang Autonomous Region and joined the Asian Citrus group in 2000.

The Tropicana mystery

The 2009 document says Hepu Plantation:

"was previously operated by Tropicana China Beihai Food Company Limited and was left unmanaged after the lease was terminated with Tropicana China Beihai Food Company Limited".

The 2005 documents adds:

"The plantation had been developed previously and operated by a US fruit juice company since 1997."

Both documents are silent on which party terminated the lease and why. Investors should be told, because it might give them some idea of the risks involved in the current leases, particularly if the Tropicana lease was terminated by the landowners or Government. On the other hand, if Tropicana terminated the lease, surrendering the land and equipment on it, then did they think the plantation was not viable? Regardless of who terminated it, did Tropicana receive any compensation for the lease termination?

As of 30-Jun-97, Tropicana China Beihai Food Company Limited (TCBF) was wholly-owned by Tropicana China Investments Ltd (TCIL), which was 51% owned by Seagram Co Ltd. TCIL was incorporated in HK on 7-Jan-93 as "Dole China Investments Ltd". In 1995, Seagram, which already owned Tropicana, bought Dole Food Company's juice unit. The HK company was renamed "Tropicana China Investments Ltd" on 30-Apr-97. Seagram sold Tropicana to Pepsi in 1998. The HK company removed its brand by changing its name to TCIL Limited on 8-May-00 and was wound up in 2002.

Connected transactions

On 26-Jul-01, Chaoda Modern Agriculture (Holdings) Ltd (Chaoda, 0682) bought 49% of Newasia Global Ltd (Newasia) from Tony Tong for HK$20m and RMB87.65m (HK$81.16m), as announced by Chaoda at the time. Newasia later became the core of Asian Citrus when it was admitted to AIM. As a result, Chaoda now owns 28.29% of Asian Citrus. Like Chaoda, Asian Citrus buys "organic fertilisers" from Fujian Chaoda Group Ltd (Fujian Chaoda), a private PRC company which is 95% owned by Mr Kwok Ho, the Chairman and controlling shareholder of Chaoda. It remains unclear why Mr Kwok has never seen fit to inject the fertiliser company into Chaoda and thereby eliminate substantial ongoing connected transactions which amounted to RMB661m last year, or about one third of Chaoda's cost of sales. As Fujian Chaoda is a private company, we don't know how much it makes or loses on these transactions.

Split registers

Asian Citrus now has two share registers: one in Jersey and one in Hong Kong, with a cumbersome procedure for moving stock between them. According to the HK listing document, by 19-Nov-09, arrangements had been made by holders of 80,556,200 shares, or 10.5% of Asian Citrus, to move their shares to the HK register. These would then be deposited into CCASS if they are to be tradable. According to the Webb-site.com CCASS Analysis service, 2.8% was in CCASS on 26-Nov-09, increasing to 9.63% on 27-Nov-09. The first settlements will be today (30-Nov-09), 2 days after the first transactions.

Don't call me "Hon"

One little amusing note: the HK listing document names one of the directors as "Mr. Hon Peregrine Moncreiffe". Perhaps he didn't even read his own biography in the document. "Hon" is not a given name, it's an abbreviation of his courtesy title, meaning "Honourable", and under the British peerage system, you are either a common "Mr." or "Hon." but not "Mr. Hon". His full name, not given in the document, is Peregrine David Euan Malcolm Moncreiffe.

The HK debut/fiasco


Asian Citrus, after its 10 for 1 split

Now we get to our pithy comments on the juicy part of this story. On 2-Nov-09, Asian Citrus split its shares 10 for 1. However, the listing document contains, in the "Summary" section on page 7, earnings per share data (EPS) without any adjustment for the split. The same information is repeated on page 160 in the "Financial Information" section, again without adjustment. The document also states, on page 183, that net tangible asset value (NTAV) per share (as at 30-Jun-09) was RMB37.3 (that's about HK$42.2), without mentioning or adjusting for the subsequent stock split. Page I-5 of the accountants' report by Baker Tilly Hong Kong Ltd (page 213 of the PDF) also contains unadjusted earnings per share (as contained in the original financial statements) but does not include a cross-reference to section C of that report, where the record is adjusted.

So it is not until the appendices, page I-64, in section C of the Accountants' Report ("Subsequent Events", page 272 of the PDF), that a diligent reader can find adjusted EPS data along with the Chinglish statement "Should the Subdivision has taken place at the beginning of the Relevant Period..." (notably, this report was signed by Andrew David Ross, whose English ought to be better than that - did he read it before signing off?). At no point in the prospectus is there an adjusted NTAV.

In the "Share Capital" section on pages 134-137, there are tables of historic share prices and volumes on the AIM and PLUS market, which are adjusted for the stock split, as noted in a small-print footnotes. The split, or "subdivision" is also mentioned in the "Statutory and General Information" in Appendix IV (pages 335, 336 and 349 of the PDF).

Comparing the post-split share price with the pre-split NTAV per share (or earnings per share) is like comparing apples and oranges, or more accurately, one segment with a 10-Segment orange. But unfortunately, that is exactly what the Stock Exchange of Hong Kong did, by posting in the text field of their trading system on the first day of trading the message "AS AT 30/6/09 NTAV: RMB37.3". This is shown highlighted at the bottom of the screen-capture below:

An alert asset manager contacted Webb-site.com by e-mail, and at 11:48 on Thursday (26-Nov-09) your editor fired off a complaint to HKEx and SFC, suggesting that they suspend the stock until SEHK can stop publishing an unadjusted NAV. Otherwise, investors would get the impression that the stock has 10 times more asset backing than it really does. The stock had opened at a high of HK$51.25 (in the pre-market auction session) and had been falling all morning.

The stock was suspended at $19.94 at 11:57, just nine minutes after our complaint was sent, after turnover of 12.72m shares for HK$291.06m, or an average $22.88 per share. When trading resumed on Friday, it crashed to a closing price of $7.10.

Who is responsible?

The regulators normally have a standard response to media inquiries about companies, that they "do not comment on individual cases". However, in the Asian Citrus case, HKEx, facing a barrage of criticism, made an exception and issued a statement on Thursday evening stating that it had requested Asian Citrus "to identify whether there was an open market for the company's securities". We're not sure what "identify" means in this context, but the implied question of market manipulation by third parties is one that the SFC can investigate, while the company has very little means of doing so.

The SFC should investigate whether there was any conspiracy to fix the opening market price in order to lead the first day's trading at a price which could only be justified if the stock had not been split. Keep in mind that there are no new issued shares in this listing, so the initial sellers must have been people who had transferred their shares from the London market, in which case they should have been well aware that the London market was trading on a post-split basis and had closed the previous day at 45.75 pence, equivalent to HK$5.89.

HKEx also stated that it "would like to remind the investing public that they should only make reference to, and only rely on, the company's listing document...". The subtext of that statement appears to be "don't rely on our trading screen - we got the NTAV from the listing document".

However, it is not as simple as that. Although every listing document carries a legal disclaimer of liability by SEHK, it is a fact that to publish such a document, you have to first go through the "dual filing" clearance of the document through the Stock Exchange's Listing Division and the SFC's Corporate Finance Division. Both regulators should have realised that the per-share information laid out on pages 7, 160 and 183 was misleading by omission of the stock split, but apparently neither of them did. At the very least, the adjusted per-share figures should have been included. Of course, the Summary section is just a summary and, as it says, "does not contain all the information that may be important to you." Nevertheless, the summary should not present information in a misleading way, and in our view, it did, and so did pages 160 and 183.

To avoid future repeats of this fiasco, SEHK should amend its Listing Rules to specifically require that historic per-share data be adjusted for any subsequent stock splits, consolidations (reverse splits) and bonus issues, wherever it appears in a prospectus.

It seems that whoever loaded the NTAV figure into the stock exchange's market data feed was either unaware of the stock split or did not stop to think that publishing such a figure without adjustment would be misleading to investors. In the first case, this demonstrates that the listing document was misleading to that person. In the second case, it demonstrates a severe lack of common sense.

The primary responsibility for the listing document rests with the Company and its directors, who were advised by the Sponsor (CLSA Equity Capital Markets Ltd) in the preparation of the document.

What can investors do?

The thrust of numerous e-mails we have received from investors since Thursday morning is "I bought the shares relying on the NTAV, now I have lost most of my money, so who can I complain to or sue?". Well, we do not give legal advice, but here's what you can do:

Class actions - add your voice

On the last point, possible litigation against the Stock Exchange (for its NTAV display) or against Asian Citrus (for its listing document) is made much harder by the absence of any class action system in Hong Kong, so investors either have to act individually, which involves prohibitive costs, or jointly, which involves prohibitive co-ordination and agreement on cost-sharing. On 5-Nov-09, the Law Reform Commission announced a long-awaited public consultation on a proposed class action system. We will be writing more about this proposal, which we strongly support, in a future article, but in the meantime, please add your voice by writing to hklrc@hkreform.gov.hk.

Existing routes

There is a small claims tribunal for claims under HK$50,000, where no lawyers are allowed, but in practice this is unlikely to be of benefit to an investor, because a defendant with adequate resources will apply to transfer the case to the District Court (up to $1m) or High Court (over $1m), as Larry Yung is doing in the CITIC Pacific case, or will appeal any adverse tribunal findings to the higher courts.

Furthermore, keep in mind that, even if we get a class action system and a viable litigation funding system and/or contingent legal fees, the ability to sue is still limited by the following problems:

We wrote about these problems in our submission "Building a Value Proposition for HK" on 4-Oct-06. So far the Government and SFC have done nothing to address them. Legislation is needed to address these points, by amending the SFO and CO. What is the point of an audit report or prospectus that investors cannot rely on?

One note, however: the Asian Citrus document is a "listing document" but not a "prospectus", as no shares were issued or sold on the back of it. Section 108 of the SFO therefore should apply. However, any brave plaintiff would have to prove that the isolated statements in the earlier pages were misleading on their own, and the defence would likely claim that anyone who made it to page 272 would know that there had been a stock split. It would be an interesting test case which would turn on whether it is OK to produce, fraudulently, recklessly or negligently, a front-end "Summary" and "Financial Information" sections containing statements which could be misleading to anyone who does not read the appendices of the document.

Alternatively, if the SFC does find market manipulation (e.g. rigging the opening price) and proves it against the parties involved, then investors may be able to "piggy back" on the finding and sue the manipulators under Section 281 of the SFO ("civil liability for market misconduct"). It's never happened yet though.

© Webb-site.com, 2009

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