EVI for Beginners
15th March 2001
The latest bubble to float out onto the GEM is a little stock called EVI Education Asia (EVI). The group offers a Chinese language-based pre-school web site to kindergartens in HK with ambitions to cover Macau and the PRC. At today's closing price of $1.11, up 192% on the IPO price, it is valued at HK$888m. Nice lucky number, you might think. Not so fast - we'll explain why you should keep your money in your pocket.
The cast
There are 3 executive directors, who are the 31-year-old Chairman and CEO Wilson Pong Wai-san (Wilson Pong), his mother Dorothy Pong-Lo Shuk-yin, and vice chairman Wings Cheung Shi-kwan. Wilson Pong's mum apparently has over 20 years experience in administration and management of kindergartens, so she should be able to steer some business his way. Wilson Pong owns 65.23% of EVI.
The two so-called independent non-executive directors are Kelvin Ko Chun-hay (Mr Ko) and Wilfred Hung Fan-wai (Mr Hung), who is coyly described as "deputy chairman of a listed company in Hong Kong".
Aw, come on guys, the Webb-site.com database will always spot these things. The listed company they declined to name is in fact pine furniture maker I-Wood International which is 35.02% owned by Wilson Pong. Can Mr Hung really be called independent? I-Wood also featured in last month's story on L.P. Lammas, which is chaired by Louis Pong Wai-yan. That stock has also been on the rampage and closed today at $0.56, up 180% on its IPO price.
As for Mr Ko, he is "currently a financial controller and company secretary of a listed company in Hong Kong". That one, as far as we know, is independent - it is called Tongda Group Holdings Ltd and makes metal chassis for PCs and for microwave ovens. He joined them in Aug-00 and before that he was the finance director at HK-listed Perennial International Ltd, which makes AC power cords.
The IPO
EVI made an IPO of 160m shares (the minimum allowed, being 20% of the enlarged company) which was priced at HK$0.38, raising $60.8m before expenses or about $50m net.
Although sponsor ICEA Capital Ltd managed to find 190 placees, only 29 of them bought more than 20,000 shares. That means that just 2% of the offering went to 161 placees. On the other hand, the top five placees took up about 70% of the offer, and the next five took up another 20%. Talk about tightly held - wind it up and watch it go - a bit like one of those elastic-band powered model aircraft that we used to play with in kindergarten, which zooms into the sky until the band unwinds, and then it stalls and nose-dives into the carpet.
So what is it made of?
Balsa wood. Oh sorry, you don't mean the model plane, you mean EVI. Well, the group claims a history dating back to 28-Jun-99, when EVI Services Ltd (EVISL) was incorporated. They say:
"the group was founded by Mr. Pong Wai San, Wilson and the first group company was incorporated on 28th June 1999"
That two-fact statement is technically true, but the two facts are not related, because the accountants' report states:
"EVISL was incorporated in Hong Kong on 28th June 1999 and was inactive since then up to 4th January 2000 when the Group acquired a 100% interest in it"
In other words, EVISL was a shelf company until Jan-00. It was originally called Landwell Development Ltd until its name was changed on 15-Jun-00.
The track record of EVI includes two periods, the first running 3 months from 28-Jun-99 to 30-Sep99, and the second for a year ended 30-Sep-00. So EVISL was only active for 9 months of the second period. The only other group company existing in the first period was a BVI company called Jaques Kurtz Co Ltd (JK), which was incorporated on 28-Jul-99 and engaged in "research and development".
In fact, the first period shows no revenue and only HK$108k of expenses. Of this, $20k was directors salaries, and $60k was a consultancy fee paid to Info-Tech Services Company (ITSC) which was beneficially owned by a director of EVISL. Apart from 2 directors, the group had no paid employees in the first period.
ITSC was in the business of "computer training and services". A bit of surfing shows that in Oct-99, ITSC was advertising on the Lingnan University graduate employment site for an IT graduate to "prepare training materials and provide training for pre-school students". Perhaps this was one of the first jobs at EVI. The contact point at ITSC was Steven K. Poon, who according to the EVI prospectus, "joined" EVI in Jul-99 as Senior Technical Officer, presumably while continuing to run ITSC.
Towards the end of the second track record period (the year to 30-Sep-00), the group began to raise equity funds. By the end of the track record, equity in EVISL had been issued as follows:
As you can see, at this stage Hanny Holdings Ltd (Hanny) had put up $10m for 10% of the company. Only $18k of equity had come from Wilson Pong, although he had lent money to the company as we explain later. Incidentally, CU Securities Ltd, the joint lead manager of this IPO, is 40% owned by Hanny, a fact we could not find disclosed in the prospectus.
Doesn't quite add up
Rather puzzling is the following check-sum we did on Arthur Andersen's accountants' report:
As you can see, the total is $18k short of where it should be after adding back the losses to the closing net assets, to get the invested equity. It is a minor discrepancy but we cannot think of an explanation, and by coincidence this amount happens to be the same as the capital injected by Wilson Pong.
Wilson Pong's entry cost
Now apart from the $18k of equity, by 30-Sep-00 Wilson Pong had lent $5.348m to EVI and Hanny was owed a "technical consultancy fee" by EVI of $5.188m. On 28-Feb-01 $5m of the loan and all of the fee were converted into shares as part of the pre-IPO restructuring.
Long-time readers will recall our article on Techpacific.com in which we revealed the embarrassingly low entry cost of all pre-IPO investors, something which prompted the Stock Exchange to require all subsequent GEM prospectuses to include, in their "Summary" section at the front, a table of such investment costs. Small breakthroughs we are grateful for. However, EVI claims that the total investment cost for Wilson Pong is "not applicable". Presumably the folks at the GEM took their word for it. Wake up and smell the coffee, here it is (expressed in terms of current shares in EVI):
We see no justification from excluding that fact from the prospectus. It shows that the IPO at $0.38 was priced at over 39 times Wilson Pong's net entry cost of 0.962 HK cents per share.
Total investment pre-IPO
The total subscribed capital before the IPO is as follows:
GR Investments Holdings Ltd is a HK-listed investment company which became a shareholder on 17-Nov-00, 4 months before the IPO and at just over half the IPO price.
After today's first day of trading, the stock closed at $1.11, giving the pre-IPO investors an average paper profit of 2,713%, and in Wilson Pong's case, a gain of 11,438%. Not bad for a year's work.
The business
Just a few words about the business. We are sure that there is a role for computers in kindergartens, but the ease with which a business like this can be assembled means that the business is not worth much more than it costs to build. Competition and low barriers to entry will ensure that is the case.
Even allowing for the $50m in cash brought in from the IPO, that puts fair value of the company at around $0.09 per share, and that is subject to the assumption that the business will actually make money. Take a discount for the risk of bad governance and you'd be looking at a price for a minority interest around $0.05 per share at best.
In fact, EVI has done very little of its own development. The web design was outsourced to local web firm Edlink Online Ltd (which has a rather nice site of its own). They won a 6-month contract starting 1-Sep-00 (yes, one month before the end of the track record) which was later extended until Jun-01. Another contract, also starting 1-Sep-00 went to a subsidiary of HK-listed systems integrator Computer & Technologies Holdings Ltd for application software development.
To date, EVI has been giving its online service away for free, so it is unknown how much kindergartens and parents will really pay for the service. The online version was only launched in Jan-01. This free service plan (in which EVI also buys and owns the on-site computers if needed) is part of the marketing strategy, and they do not plan to charge for some time. The free trial period will end "no later than the first quarter of 2002".
This means that the earliest quarter in which they record subscription revenue might be 30-Jun-02, with results released by mid-August 2002. Thanks to the now-infamous GEM waivers, the lock-up period on this stock will expire almost a year earlier, on 15-Sep-01, so the founders will be free to sell long before we know whether EVI is ever going to make any money.
This stock rivals stable-mate L.P. Lammas as one of the most over-rated and insubstantial stocks GEM has ever seen.
© Webb-site.com, 2001
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