The Sister Knew

On Monday, Webb-site.com broke the story of how CNOOC had been lent up to RMB6.6bn to its parent group without shareholders' approval. Since then, media have reported that the Stock Exchange is looking into the matter, and that the company's CFO claims no rules were broken - a claim which does not stand up to our scrutiny.

CNOOC's Sister Knew
22nd April 2004

On Monday 19-Apr-04, we urged investors to vote against the proposed connected transactions in which CNOOC Ltd (CNOOC, 0883) would lend up to RMB6,800m to CNOOC Finance Corp Ltd (CNOOC Finance), a 62.9% subsidiary of its parent, China National Offshore Oil Corporation (CNOOC Parent).

Since then, the media have picked up on the story, and although there has been no official company announcement from CNOOC on which investors could legally rely, it's Chief Financial Officer Mark Qiu has been telling the media that the company hasn't broken any rules.

This claim, which may be intended to affect the voting result at the meeting next week in the company's favour, does not stand up to the slightest bit of scrutiny - as we will show below. Frankly we find this behaviour disappointing and misleading to investors who are in the middle of a voting decision. If the company has anything to say about this, then it should do so by way of formal announcement and adjourn the extraordinary shareholders' meeting until investors have had sufficient time to digest the new information.

Refuting Mr Qiu's claim that no rules have been broken, we point first, to CNOOC's own announcement of 8-Apr-04, in which it admitted that "the transactions with CNOOC Finance contemplated by the Framework Agreement constitute continuing connected transactions for the purposes of the Listing Rules". These transactions include "placing of [CNOOC]'s cash deposits with CNOOC Finance" so it can hardly be the case that the same transactions in the past were not connected transactions.

The left hand knows what the right hand does

Second, CNOOC Parent has another HK-listed subsidiary, China Oilfield Services Ltd (COS, 2883). Mr Fu Chengyu is President of CNOOC Parent and Chairman of both CNOOC and COS, so he signed off on the COS prospectus and is presumed to know what was in it.

On page 87 of its prospectus dated 11-Nov-02, COS makes clear that it (and the Stock Exchange) regards its transactions with CNOOC Finance, including cash "deposits", as connected transactions for which it needed a pre-IPO waiver, so it obtained a waiver effective for 3 years ending 31-Dec-04. Page 89 shows that this waiver in each year is capped at 10% of turnover for the previous year.

What this shows is that CNOOC Parent and CNOOC must have been aware at least as early as 11-Nov-02, when the COS prospectus was published, that transactions between a HK-listed subsidiary and CNOOC Finance, including the so-called deposits (or loans) to CNOOC Finance, were regarded as connected transactions under the Listing Rules, and yet it did nothing about the same type of transactions with CNOOC for another 17 months until 8-Apr-04.

By the end of 2003, COS was owed RMB252.6m by CNOOC Finance, or about 9.3% of turnover for the preceding year, just below the 10% limit. Before the end of this year, COS must seek approval from minority shareholders if it wishes to continue lending money to CNOOC Finance. We urge investors to veto that arrangement too, when the time comes.

Let's be clear. Whether you call these transactions "deposits", "advances" or "loans", the result of such transactions is the same, namely that CNOOC and COS are owed money by CNOOC Finance, and that's all that should matter as far as the Listing Rules are concerned.

And if they didn't break the rules, then there's no limit

The most worrying thing about Mr Qiu's claim is that if CNOOC now believes that these loans to CNOOC Finance are somehow outside of the connected transaction Rules, and if the Stock Exchange were to agree with that position, then that would make next week's shareholders' approval of the loans unnecessary and non-binding, in which case, whether or not the arrangement is approved by minority shareholders, the company may just carry on making these loans (or if you prefer, deposits) anyway, without regard to the proposed limit.

A race to vote

Shareholders are almost out of time to vote, because most public shares are held through Hong Kong Securities Clearing Co Ltd (HKSCC), the operator of the clearing system which is a subsidiary of Hong Kong Exchanges and Clearing Ltd. HKSCC told us today that the voting deadline is 3.45pm tomorrow, Friday 23-Apr-04, HK time, even though the meeting does not take place until 28-Apr-04.

We have also received an e-mail from a US investor who has yet to receive proxy forms for his CNOOC ADRs, so there is some concern that US investors will not have time to vote.

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CNOOC's Sister Knew 22nd April 2004

The left hand knows what the right hand does

And if they didn't break the rules, then there's no limit

A race to vote

CNOOC's Sister Knew
22nd April 2004